Stock market 101: The ins and outs of an IPO

Chances are you’ve heard the term IPO bandied about when it comes to companies and the stock market.

So what does IPO actually mean? And how do IPOs work?

Let’s take a closer look…

What is an IPO?

IPO stands for initial public offering. If a company decides to list on the stock market, an IPO is the way to achieve that.

IPO’s are complicated and lengthy processes. If a company decides to list on the Johannesburg Stock Exchange, it needs to comply with a whole host of listing requirements that the stock exchange dictates.

Once a company decides to list on the stock market and embarks on an IPO, it usually does so with the help of a large financial institution. In most cases, this institution will underwrite the IPO for the company.

What this means is if the company doesn’t sell a certain amount of its shares at its IPO, the financial institution will buy them.

How an IPO works

The first thing a company needs to work out is how many shares it’s going to issue. This involves deciding how much of the company it’s willing to put up for sale.

Then with its associated financial institution, the company will decide how much to sell its shares for.

With IPOs, they’ll either be oversubscribed or undersubscribed.

Oversubscribed means the public is prepared to buy more shares than are available.

Undersubscribed means the public isn’t prepared to buy all the shares available and this is where the underwriter would step in and buy the remaining shares.

IPOs are one of the primary function of the stock exchange. There tends to be more IPOs when the market is doing well and less when the market is doing badly.

So there you have it, the ins and outs of IPOs.

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